Mutual Funds’ Reporting Frequency and Strategic Share Repurchases

Abstract

We study the consequences of increased reporting frequency in a delegated asset management framework. We build on economic theory establishing that more frequent information about an agent's action increases the agent's career concerns and short-termism. Consistent with theory, we find that following a regulatory change that increased the reporting frequency of mutual funds' portfolio holdings, mutual funds are more likely to divest from firms that miss a quarterly earnings target. This suggests that funds managers become more short-term focused as missing an earning target leads to a negative market reaction. Next, we find that mutual fund managers' short-termism translates into portfolio firms' short-termism, as firms strategically increase share repurchases following the regulatory change. Finally, we find that increasing share repurchases pays off, as it significantly mitigates mutual funds' outflows. Our results shed light on how increased reporting frequency between mutual fund managers and their investors induce firms' short-termism.

Keywords: Myopia, Reporting frequency, Share repurchases, Mutual funds

JEL Classification: G23, G28, G30, G31, M40, M41